Labour’s tax addiction will end in tears
It is now pretty much universally accepted that the government will launch a fresh tax raid in October’s budget. City economists expect the Treasury to be on the hunt for between £10bn and £20bn of additional revenue, though given the expensive u-turns on winter fuel payments and welfare reform combined with likely lower growth forecasts the picture could in fact be much worse. The IFS has warned £30bn or even £40bn might be on the table.
The Chancellor has acknowledged the “financial consequences” of recent policy decisions (such as abandoning the money saving measures of the welfare reform bill) and her difficult job has become almost impossible in recent weeks.
Ministers have described last October’s £40bn tax raid as “the low-hanging fruit” which means they’re really going to have to reach for any further revenue-raising ideas.
Yesterday, Keir Starmer reaffirmed his commitment to promises made in his party manifesto not to raise income tax or VAT, so we ought to be able to rule those out. What options does that leave on the table?
Fiscal drag will likely do a lot of the heavy lifting (again) with the PM pointedly refusing to rule out extending the freeze on income tax thresholds. The Chancellor said last year she’d unfreeze them by the end of this parliament, but that now looks highly doubtful.
Wealth taxes, bank taxes, capital gains tax…
When it comes to a wealth tax, ministers are being deliberately coy. Meanwhile there’s plenty of chatter in the City that the bank levy could be raised (Angela Rayner loves the idea of taxing banks) and there’s an expectation that changes to the tax treatment of pensions will feature in October’s shopping list of misery. Perhaps capital gains tax will finally be aligned with income tax rates (another favourite of the Labour Left) while dividends could also be in the firing line.
God, this is all so depressing.
The tragedy is that the economy needs some taxes to fall, not just to lower the overall burden but to spark some much-needed activity that would actually yield economic gains for the government.
Consider Stamp Duty Land Tax which has gummed up our housing market; reducing, replacing (or even temporarily suspending) this tax would unleash a wave of transactions.
The same applies to the tax on share trading; there would be an obvious and immediate benefit to scrapping it but its direct revenues currently sit on a Treasury spreadsheet and nobody can see past it.
The government has got itself addicted to tax and, like an addict, it’s now incapable of looking beyond the next hit.